The oil price will hardly return to the $100+ level (Source: NASDAQ)
Deputy prime minister Shuvalov declared two weeks that the economic crisis in Russia is over. His main argument was that the drop in the GDP in Q1 was less than expected, -1,9% (while the estimate was at -2,6%). His statement was confirmed by his boss, Dmitry Medvedev. Some indicators have shown a positive development lately, like the strengthening of the ruble, the Central Bank’s reduction of the interest rate from 14% to 12,5% and the oil price which is increasing little by little.
Well, the economic perspective for Russia is in fact very grim, and the four main problems are the following:
- The domestic money sack is not getting bigger: Russian banks and companies have close to no access to Western money. Sanctions can’t be lifted as long as Russia continues its aggressive behaviour in Ukraine and towards most of its other neighbors, as former prime minister Primakov stated earlier this year. The lack of international funding makes it very difficult to keep existing businesses running, not to mention developing new business projects. When the pile of money is diminishing and the number of people wanting that money stays the same, we are at looking at some serious fighting ahead. Last week three more banks lost their licenses, and more will follow.
- The Russian Reserve Fund is getting smaller every day. Even the Finance Ministry admits that the heavy spending from the fund threatens to empty it in a period of 18 months. This year alone, $59 billions (of the fund’s total of $98 billion) will be spent. In the first quarter of 2015 Russia spent 9% of the GDP on the military! Big national companies are lining up to try to get a handout.
- Incompetent owners and top managers. The silovikis from KGB/FSB and other power structures have secured major stakes and top positions in the biggest companies. During the Soviet period the industry was run by incompetent party cadres, and the result was disastrous. The same thing is happening now – the main quality in a top manager is loyalty to the regime.
- Russian industry is heavily dependent on imported parts. Some may be substituted by domestic goods and import from countries which Russia continues to do business with, but some industries will suffer big time when they can’t import key parts from Europe, Japan and USA.
Russia’s self-inflicted isolation is already damaging to the country, and things will only get worse. In April, the processing industry production fell by 7,2%. The oil and gas sector is stable, but the car building industry has seen a drop by 22% in one year. Many plants have stopped the production temporarily. The food processing industry is also falling.
There are no short-term solutions. Russia must of course withdraw from Ukraine, but Putin and his entourage of hardliners don’t want to do that. They prefer to steal more money from the pensioners and the working people instead.